As the Reserve Bank of India (RBI) continues to defend the rupee from the mighty dollar’s rise, India’s depleting foreign exchange (Forex) reserves are likely to decline further, falling to their lowest level in over two years by end-2022, according to a Reuters poll.
The central bank has drawn down its Forex reserves by about $100 billion to $545 billion from a peak of $642 billion a year ago, in a battle that has so far failed to stop the depreciation of rupee to a record low against the dollar.
According to the Reuters report, those reserves are forecast to fall another $23 billion to $523 billion by the end of this year, a poll by 16 economists found. If realised, that would be the lowest level in over two years. Forecasts were in a $500-540 billion range. That means the RBI will run down forex reserves at a rate last seen during the global financial crisis of 2008, when they fell over 20 per cent.
It has already burnt reserves at a much quicker pace than during the taper-tantrum period in 2013 when the US Federal Reserve suddenly cut government bond purchases.
About a decade later, India finds itself in a similar situation. Despite regular interventions via dollar sales and expectations for more, the rupee has depreciated nearly 10 per cent against the dollar this year and hit a record low of 81.95 per dollar on Wednesday.
"With the latest move that we have seen in the rupee, I expect the RBI to continue intervening to perhaps not try and defend a particular level of the currency, but certainly try and reduce volatility," said Sakshi Gupta, principal economist, HDFC Bank.
"We would see even more interventions in the coming days to deal with the increasing pressure on the rupee and a widening current account deficit, leading to a greater drawdown in the forex reserves by the end of this year."
A few economists in the poll warned overall forex reserves could fall more than their forecasts over the coming year due to a ballooning current account deficit, which was expected to end the fiscal year at its widest in a decade. Part of the reason for the drawdown is the RBI has lagged the US Federal Reserve with interest rate hikes.
The Fed, which has raised rates by 300 basis points from near-zero in March to 3.00 per cent-3.25 per cent, is now expected to do 150 basis points more over the coming months, a separate Reuters poll showed.
The RBI, which only started hiking in May and has raised the repo rate by just 140 basis points, appears nearly done. It is forecast to hike by a mere 60 basis points more in this cycle, with 50 due this week.
"The RBI should reduce the pace of intervention sooner rather than later to allow rupee to trade more in line with fundamentals," said Anubhuti Sahay, senior economist, Standard Chartered.